AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has affirmed the following rating action on Midland County Hospital District, Texas' (the district) outstanding bonds:
--$103.7 million limited tax bonds, series 2009A and 2009B at 'AA'.
The Rating Outlook is Stable.
SECURITY
The bonds are direct obligations of the district payable from the levy and collection of an ad valorem tax levied on all taxable property within the district, within the $0.75 per $100 of taxable assessed valuation (TAV) allowable limit.
KEY RATING DRIVERS
ESSENTIAL SERVICE PROVIDER: The district's Midland Memorial Hospital (MMH) is the only full service health care provider in the county. The hospital has strong and increasing market share.
REVERSAL OF GROWTH TREND: TAV doubled over the past six years through fiscal 2015 reflecting the county's role as the commercial hub for Permian Basin energy activity. Preliminary growth of a more modest 4% in fiscal 2016 TAV reflects lower mineral values, offset by growth in other property values. Fitch expects flat-to-declining TAV in the near term based on the current level of oil prices.
SIGNIFICANT TAXING MARGIN: The district has maintained a low tax rate with significant capacity below the statutory maximum rate, providing ample financial flexibility and cushion if TAV declines more than expected.
VARIABLE FINANCIAL PERFORMANCE: Core hospital operations remain reliant on ad valorem tax revenues and supplemental federal government funding. Operations have been volatile and sensitive to local economic trends, resulting in below expectation inpatient admissions, increased bad debt expense, and soft 2014 and 2015 year-to-date performance. Management has implemented operating cost cuts for 2015 and a staggered strategic initiative which Fitch believes may help stabilize core hospital operations.
MANAGEABLE DEBT: The district's overall debt burden is moderate, with no further debt issuance planned for the near term.
RATING SENSITIVITIES
FINANCIAL FLEXIBILITY: The rating is sensitive to shifts in fundamental credit characteristics including a sustained negative trend in core hospital operations, which Fitch does not currently expect and which may lead to negative rating pressure. The combination of variable hospital operations and an energy-sensitive economy likely limit upward movement on the rating.
CREDIT PROFILE
The Midland County Hospital district resides in rural west Texas and includes the city of Midland.
ESSENTIAL SERVICE PROVIDER
The district owns and operates Midland Memorial Hospital (MMH), the only general acute care hospital in Midland County (GO bonds rated 'AAA' by Fitch). MMH has 230 beds in operation.
ENERGY-BASED ECONOMY
The Permian Basin is one of the country's largest oil and gas reservoirs whose exploration and drilling has fueled strong economic activity. The county's fiscal 2015 TAV of $21.2 billion represents a doubling of value since fiscal 2009. Fiscal 2015 market value per capita is a high $153,000.
Oil, gas and other mineral values comprise 24% of the fiscal 2015 tax base, with the top 10 taxpayers making up 16%. Accounting for approximately 5.5% of TAV, Pioneer Natural Resources has remained the county's top taxpayer for over 10 years. Despite the recent decline in oil prices, preliminary fiscal 2016 TAV Increased modestly year-over-year due to growth in residential and commercial properties, which offset the impact of lower fourth quarter 2015 oil prices on fiscal 2016 mineral values. Fitch anticipates flat to declining near term TAV assuming the current price of oil.
Top employers outside of oil and gas include the education, medical (including the district), and governmental sectors. Other industrial and business operations in the county include semi-conductor products, telecommunications, dairy products, plastics, and household goods. The March 2015 unemployment rate of 2.9% reflects five years of solid employment base growth.
VARIABLE FINANCES; ONGOING DEPENDENCE ON TAX AND SUPPLEMENTAL REVENUES
Hospital profitability has weakened in fiscal years 2014 and 2015. Softening volumes below projections have resulted in an operating deficit from core hospital operations in fiscal 2014 and through April 2015 and an increase in bad debt expense. Profitability remains reliant on property tax revenues for indigent care (8% of total revenues) and supplemental federal government funding. Management anticipates operating cost cuts in the short term and strategic investments in the middle term, which Fitch believes may bolster profitability. The district's fiscal 2014 payor mix was 39% commercial insurance, 35% Medicare, 9% self-pay, and a modest 8% exposure to Medicaid.
Fiscal 2014 liquidity of 79 days of cash on hand was below average but much improved from 46 days in fiscal 2011. The hospital has a $10 million line of credit which helped to provide liquidity in 2014 during federal reimbursement delays from the DSH program.
The district has strong market share: the hospital captured 78% of first quarter 2014 admissions in its primary service area (Midland County), up from 75% in 2012. Glasscock, Andrews, Martin and Howard counties as well a portion of Ector County represent a secondary service area. The nearest hospitals are located in Odessa (Ector County), approximately 20 miles from MMH.
Financial flexibility is provided by the district's historically low tax rate and ample taxing capacity. A fiscal 2015 tax rate of $.1183 per $100 of TAV provides significant headroom in relation to the authorized rate of $0.75.
MODERATE DEBT/UNDERFUNDED PENSION PLAN
Overall debt is moderate at 2.7% of market value. Direct debt amortization is below average at 41% within 10 years. The district's near term capital needs are moderate and are expected to be internally funded for the most part.
The funding level for the district's single-employer defined benefit plan is below average at 62.7% as of Sept. 30, 2014 (52% based on Fitch's more conservative 7% investment assumption rate). The $21.6 million unfunded liability represents less than 1/10th of 1% of the market value of the tax base.
The plan was closed to new participants in 2005, at which time new employees were enrolled in defined contribution pension plans. In fiscal 2013, the district began funding the plan in excess of actuarially required contributions to improve the funding status.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors
Applicable Criteria
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986618
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986618
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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